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2011 Union Budget Highlights & Impact

UNION BUDGET ANALYSIS FY2011-12 Intent clear, is implementation near? The FM has presented a reform-oriented budget, focusing equally on containing inflation while promoting growth in a challenging environment.Targeted fiscal deficit of 4.6% is a big positive, provided the Government is able to control the expenditure to the desired extent.In a bid to reduce supply side constraints, the FM has allocated significant sums to agriculture, especially for commodities, which have seen sharp price rise. More importantly, there is significant stress on removing supply bottlenecks, in line with our pre-budget expectations. To sustain growth, investments in infrastructure have been increased and the FM has also announced measures to attract more private and foreign funds, especially in debt. We expect rigorous implementation of the allocated sums. Plan expenditure is up by 11.8% over and above the 31% rise in FY11 (RE). Equitable growth has rightly been focused on with higher allocations for education, public health, agriculture and employment. The FM has announced his intention to introduce various reforms during FY11-12. Some of the important bills relating to banking, insurance and pension can be introduced. The FM has announced that, eligible foreign investors will be allowed to invest in Mutual Funds. Cash - based direct subsidy is expected to be launched in FY11-12. A constitutional amendment bill on GST will be introduced in the budget session and DTC is expected to be implemented WEF FY12-13. The 4.6% fiscal deficit target for FY11-12 came as a pleasant surprise. However, the Government will have to rely on effective implementation to control expenditure to the desired extent. Removing control on fuel prices and effective implementation of direct cash subsidy can help in reducing overall expenditure. On indirect taxes, the headline rates have been left unchanged. However, additional services have been brought under service tax net and base excise duty rate has been increased from 4% to 5%. With a view to compensate consumers for inflation, income tax exemption limit has been increased by Rs.20,000 to Rs.180,000, in effect putting Rs.2,000 more in the hands of the individuals. A marginal increase in MAT will be largely offset by a reduction in surcharge. Non-MAT companies will see tax burden reduce marginally. The budget is largely in line with our expectations as far as larger issues of growth, inflation and fiscal discipline are concerned. While the market's concern on excise duty rise was addressed (no increase) the concern on fiscal deficit will likely be resolved during the year, we opine. Thus, we do not expect any major impact on the markets in the near term. Over the medium - to - long term, we expect the valuations and global economic scenario to dictate market movements. We opine that, valuations, based on FY12E consensus earnings, leave scope for gains over this period.

Sectoral impact Budget Impact Sectors Positive Agriculture/Fertilizer, Automobiles, Banking & NBFC, Construction, FMCG, Logistics, Retail Neutral Capital Goods & Engineering, Information Technology, Media, Metals & Mining, Power, Real Estate & Telecom Negative Aviation, Cement, Hotels, Oil & Gas

Attacking supply side constraints in agriculture With WPI inflation remaining at elevated levels and food inflation at 11.5%, Mr.Mukherjee has tried to address some long pending structural issues in agriculture.These issues are expected to attack the supply side constraints and ease inflation.We had expected higher focus on removing supply bottle-necks to increase supplies. We opine that, in the backdrop of a challenging fiscal situation, effective implementation rather than high spends, will alleviate the supply side issues effectively. The budget has stated the Government’s express intent to removal of production and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry and fish. Approval is being given to set up 15 more Mega Food Parks during 2011- 12. Moreover, efforts are being made to augment storage capacity through private entrepreneurs and warehousing corporations area also being fast tracked. Another important provision is that of making capital investment in creation of modern storage capacity eligible for viability gap funding of the Finance Ministry. It is also proposed to recognize cold chains and post-harvest storage as an infrastructure sub-sector allowing them to avail additional benefits. There is a repeat mention of bringing about a second green revolution in parts of Eastern India and allocation of Rs.4bn have been made towards improving ricebased cropping system in this region. Also, the FM has tried to address the structural short-fall in important commodities like pulses and oil palms. Allocations have been made to promote 60,000 pulses villages in rain-fed areas. As per the first advance estimates, production of kharif crop in 2010-11 is estimated to be 114.63 mn tonnes, which is lower than the target of 125.31 mn tonnes set out for the year (but higher than 103.84 mn tonnes during last year). To provide support to agriculture, the target credit growth for farmers has been raised to Rs.4.75trn v/s Rs.3.75trn in FY11. Allocation under Rashtrita Krishi Vikas Yojana has been increased from Rs.67.5bn to Rs.78.6bn YoY. However, there have been no duty cuts, either excise or customs, to cushion the impact of high prices. The FM was likely constrained by the significant volatility in the crude prices during the year as well as in past years, which may render the duty changes non-effective. We believe that, the FM may act once the volatility subsides. Sustained focus on growth The Finance Minister has rightly focused on sustaining and improving the high growth rates of the economy. After experiencing a slowdown in FY09 and the early part of FY10, Indian economy has recovered smartly. According to the advance estimates of CSO, the Gross Domestic Product (GDP) growth for 2010-11 is pegged at 8.6%, which will be the second fastest growth across major economies. The growth is expected to be led by all three segments viz agriculture (5.4%), industry (8.1) and services (9.6%) The economic survey for 2010-11 has laid down targets of 9% in FY12 and double-digit growth rates in the future years. However, these are subject to several challenges like high crude prices, monsoons and global economy in the short term and structural changes in the economy over the longer term. Towards this objective, the FM has allocated significant sums towards investments in agriculture as well as infrastructure. The plan expenditure has thus, been increased by about 11.8% as compared to the revised estimates for FY11. This is over and above the 30% rise in FY11 (RE). The allocation for infrastructure has been increased to Rs.2.14trn, about 23% higher YoY. Infrastructure allocation now forms 48.5% of total plan allocation. To boost infrastructure development, tax free bonds of Rs.300bn are proposed to be issued by Government undertakings during 2011-12. Financial assistance will be made available for metro projects in Delhi, Mumbai, Bengaluru, Kolkata and Chennai. Moreover, capital investment in fertiliser production is now proposed to be included as an infrastructure sub-sector.

More private partnership and administrative reforms targeted While allocations have been increased, thrust is also on attracting more private funds and removing procedural and administrative bottlenecks. To attract more private funds, Government will come up with a comprehensive policy for further developing PPP projects. To enhance the flow of funds to the infrastructure sector, the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, has been raised by $20bn to $25bn. FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, they will be allowed to trade amongst themselves during the lockin period and this may make the bonds more attractive for FIIs. To attract foreign funds for financing of infrastructure, the FM has proposed to create special vehicles in the form of notified infrastructure debt funds. The interest payment on the borrowings of these funds is proposed to be subjected to a withholding tax rate of 5% instead of the current rate of 20%. The income of the fund is proposed to be exempted from tax. Also, the income tax exemption of Rs.20,000 available to individuals for investing in infrastructure funds, has been extended by one year. With a view to facilitate smooth functioning, two Committees have been set up for greater transparency and accountability in procurement policy and for allocation, pricing and utilisation of natural resources. Environmental aspects have gained importance of late and have been a prime reason for delays in a few projects. Issues relating to reconciliation of environmental concern from various departmental activities including those related to infrastructure and mining are proposed to be now considered by a Group of Ministers. Moreover, in pursuance of recommendations of Second Administrative Reforms Commission, 62 departments have been covered under Performance Monitoring and Evaluation System (PMES) to assess their effectiveness.

With a view to make the growth more sustainable, the Government has continued its focus on inclusive growth. The Government has announced various measures for the social sector and agriculture. We concur with the Government's assessment that, high growth in the economy can be sustained only if it is equitable and inclusive growth. The most important announcement made was that the National Food Security Bill will be introduced in the Parliament during FY12. We see this as a big reform push, if implemented. Higher allocations have been made for farmers, poor, women, children, etc. Allocation for social sector has increased to Rs.1.61trn i.e. 36.4% of the total plan outlay. Social sector schemes allocations Scheme/Initiatives Allocation Bharat Nirman (Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Rs. 580 bn Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna, Indira Awas Yojna, National Rural Drinking Water Programme and Rural telephony) MGNREGA Rs. 400 bn Rashtriya Swasthya Bima Yojana Rs. 267 bn Sarva Shiksha Abhiyan Rs. 210 bn Pradhan Mantri Gram Sadak Yojna Rs. 200 bn National Program for Mid Day meals in school Rs. 103 bn National Rural Health Mission Rs. 178 bn Source: Budget document 2011-12 Significant reforms proposed - implementation to be the key In our opinion, this is a reforms oriented budget in the sense that, the FM has introduced or has indicated that he will introduce several long - pending reforms during FY11-12, post political consultations. The Constitutional Amendment Bill for GST is expected to be introduced in the current budget session with the GST itself expected to be rolled out in FY13. The FM has also indicated that DTC will be rolled out WEF April 1, 2012. Apart from these, the FM has indicated that, the National Food Security Bill will be introduced during the year. To ensure greater efficiency, cost effectiveness and better delivery for LPG, kerosene and fertilisers, the FM has proposed that, Government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner. This, we opine, will be a significant reform, if implemented, which can lead to benefits flowing to targeted people and leakages in subsidies being sealed. As part of the financial sector reforms, the FM has also proposed to move the following legislations : The Insurance Laws (Amendment) Bill, 2008, The Life Insurance Corporation (Amendment) Bill, 2009, The revised Pension Fund Regulatory and Development Authority Bill, Banking Laws Amendment Bill, 2011, Bill on Factoring and Assignment of Receivables, The State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2009 and Bill to amend RDBFI Act 1993 and SARFAESI Act 2002. Mr. Mukherjee has also proposed to bring suitable legislative amendments in the budget session to the Banking Regulations Act for giving some additional banking licences to private sector players. Thus, several important reforms are expected to be introduced during the year. We view this intent very positively. However, these will be implemented only after extensive political consultations and hence, we believe that, implementation will once again be the key.

FY12BE fiscal deficit at 4.6% - will it, won't it On the expenditure front, the non - plan expenditure is budgeted to fall marginally over revised estimates of FY10-11. The petroleum subsidy is expected to fall by about 38% over FY11RE. This comes at a time when crude prices are above the $100 per barrel mark, making the budgeted number seen very low. We also believe that, higher amount may have to be provided in the budget unless the crude price reacts down sharply (as it did in FY09). Alternatively, the Government may deregulate the diesel prices at an opportune time when the inflation rate moderates. However, there is a risk of this figure trending higher during FY12. We note that, the FM has committed to implementing the cash - based subsidy scheme on LPG and Kerosene, which, if implemented, can reduce the subsidy burden. We also opine that, FM has made some strong reduction assumptions on the expenditure side : Total revenue expenditure is budgeted to grow by only 1% in FY12BE against 13% in FY11RE; similar estimates were made in FY11BE Allocation for Social security and welfare is budgeted at Rs50bn against Rs200bn in FY11RE and Rs173bn in FY11BE On the revenue front, corporate taxes are expected to grow by 21.5% v/s about 21% growth in FY11 (RE). Given the current high commodity prices (and consequent impact on margins), recent slowdown in manufacturing and delays in closures of major projects, this number may turn out to be optimistic. Thus, we believe it may be difficult for the deficit targets to be met unless reforms on subsidy front are undertaken or global commodity prices cool down significantly. Variance in Non-Plan expenditure (Rs bn) FY 11RE FY 12BE Interest Payments and Debt Servicing 2407.6 2679.9 Defence Expenditure 1515.8 1644.2 Pensions 532.6 545.2 Interest Subsidy 52.2 68.7 Grants to State Govts 517.6 654.7 Police 275.9 296.9 Capital Outlays (excluding defence) 277.0 132.1 Petroleum Subsidy 383.9 236.4 Agri Debt Waiver & Debt Relief Scheme 120.0 60.0 Fertilizer Subsidy 549.8 500.0 Grants & Loans to Public Enterprises 65.9 5.1 Postal Deficit 58.5 50.2 Other Non-plan Expenditure 1458.8 1288.6 Total (Non-Plan) Expenditure 8215.5 8161.8 Source: Annual Budget 2011-12 DIRECT TAXES Corporate tax No change in corporate tax rate; MAT rate increased by 50bps; surcharge reduced There have been no changes in the corporate tax rate. However, the MAT rate has been raised from 18% to 18.5%. On the other hand, the surcharge has been reduced from 7.5% to 5%. This will bring down the effective tax rate for non- MAT corporates from 33.2% to 32.45%. On the other hand, for MAT paying companies, the burden will marginally rise by 0.075bps as the increase in MAT is set-off by a reduction in surcharge. MAT for SEZ developers and SEZ units WEF FY12 - a negative The budget has imposed MAT for SEZ developers and for units operating in SEZs. Companies have to pay MAT on the Book profits as against the profits derived under the Income Tax Act, if the taxable income is less than 30% of the book profits. This will have an impact on the cash flows of these companies. These companies will now have to pay MAT WEF FY12 despite they being eligible for tax breaks. This will have an impact on their cash flows but not on reported rofits as they will be able to claim deferred tax benefits. Thus, we believe that, this will be largely a cash-flow impact. Further benefits on personal income tax front Increase in basic exemption limit The budget has provided further benefits to individual tax payers by increasing the basic exemption limit from Rs.160,000 per annum to Rs.180,000 per annum. The tax benefit is expected to be about Rs.2,000. The exemption limit for women assessee has been left unchanged at Rs.190,000. However, exemption limit has been enhanced to Rs.250,000 (v/s Rs.240,000) and qualifying age reduced from 65 years to 60 years for senior citizens. Higher exemption limit of Rs.500,000 has been recommended for Very Senior Citizens, who are 80 years or above. We believe that, this has been done to provide more money into the hands of the lower income class and the senior citizens, in the backdrop of rising inflation. This increase of Rs.2000 per individual will also not result in any increase in discretionary spends, thus having no impact on inflation. On the other hand, by doing this, the FM has brought the exemption limit more in line with the proposed limit of Rs.200,000 per individual under DTC. Investment - linked tax incentives have been continued. A eduction of Rs.20,000 per annum will continue to be allowed on investments in infrastructure bonds. While on the one hand, it will induce savings, it will also generate funds for infrastructure investments. A net revenue loss of Rs.115bn is estimated to be incurred as a result of the direct tax proposals.

Direct taxes Source: Economic Survey 2010-11, Annual Budget FY2011-12 INDIRECT TAXES The budget has kept the headline rates of excise duty, customs duty and service tax unchanged, in line with our expectations. Markets were expecting an increase in excise duties by 200bps to 12%. Rate of tax on services has been retained at 10% to pave the way forward for GST. Peak customs duty rate has been left at 10%. However, some rationalization has been done to unify three rates namely, 2%, 2.5% and 3% at the middle level of 2.5%. Certain services, hitherto untaxed, brought within the purview of the service tax levy. Proposals relating to Indirect Taxes are estimated to result in a net revenue gain of Rs.113bn for the year. Taking into account the direct taxes, the net revenue loss is estimated to be Rs.2bn for the year. Major proposals are listed later. Capital markets - neutral in short-term but positive in the longterm The budget is largely in line with our expectations as far as larger issues of growth, inflation and fiscal discipline are concerned. While the market's concern on excise duty rise was addressed (no increase) the concern on fiscal deficit will likely be resolved during the year, we opine. Thus, we do not expect any major impact on the markets in the near term. Over the medium term, we believe that, strict implementations of proposals, implementation of reforms and positive action on subsidy (important from fiscal deficit perspective) would be the likely positive triggers for the market. However, unfavourable developments on the global economic front or a sharp rise in commodity prices may have a negative impact on markets. We opine that, given current conditions, valuations, based on FY12 consensus earnings are reasonable, and leave scope for gains over this period. Foreign investors who meet KYC requirements for equity schemes will now be allowed to invest in mutual funds and this could be a positive for the equity markets over the medium term.

BUDGET HIGHLIGHTS FY2011-12 Customs duty Pre-budget Post-budget Food/ Agro-Processing/ Agriculture Specified Agricultural Machinery 5% 2.50% Basic Customs Duty for parts of above 7.50% 2.50% Micro Irrigation Equipment 7.50% 5% Raw Pistachios 30% 10% Sun-Dried Seedless Raisins 100% 30% Cranberry products 30% 10% Export of de-oiled rice bran oil cake 0% 10% Textiles Raw Silk 30% 5% PTMEG, Diphenylmethane-4, MDI 7.50% 5% Acrylonitrile 5% 2.50% Sodium Polyacrylate 7.50% 5% Caprolactum 10% 7.50% Nylon chips, fibre and yarn 10% 7.50% Rayon Grade Wood Pulp 5% 2.50% Capital Goods/ Infrastructure Specified Gems and Jewellery Machinery 7.50% 5% Environment-Friendly Items Solar Lanterns 10% 5% Health Sector Endovascular Stents 5% 0% Specified Life Saving Drugs 10% 5% Lactose for Homeopathy Medicines 25% 10% Paper Waste Paper 5% 2.50% Metals Ferro-Nickel 5% 2.50% Export Duty-Iron Ore 20% 30% Vanadium Petroxide, Vanadium Sludge 7.50% 2.50% Miscallaneous Carbon Black Feed Stock 5% 2.50% Petroleum Coke 5% 2.50% Mineral Gypsum 5% 2.50% Excise duty Item Pre Budget Post Budget Sugar Confectionary, Pastry and Cakes 4% 5% Starches 4% 5% Paper and Paper Products 4% 5% Textile Intermediates and textile Goods 4% 5% Drugs, Medical Equipments 4% 5% Automatic Looms, Projectile Looms 0% 5% Capital Goods Parts of Specified textile Machinery 10% 5% Environmental Friendly Goods Hybrid Kits 10% 5% Cement Mini Cement Plant Selling Price< 190/50 kg bag Rs 185/Tonne 10% ad valorem Selling Price>190/ 50kg bag Rs 315/ Tonne 10% ad valorem + Rs 30/ Tonne Cleared Other than in packaged form Rs 215/ Tonne 10% ad valorem Other Than Mini Cement Plant Selling Price <190/ 50 kg bag Rs 290/ Tonne 10% ad valorem + Rs 80/ Tonne Selling Price > 190/ 50 kg bag 10% of sale price 10% ad valorem +Rs 160/ Tonne Cleared Other than in packaged form 10% or Rs 290/ Tonne (whichever higher) 10% ad valorem Cement Clinker Rs 375/ Tonne 10% ad valorem + Rs 200/ Tonne Health Sanitary Napkins, baby & clinical diapers 10% 1% Paper and Paperboard Greaseproof Paper and glassine paper 10% 5% Precious Metals Serially Numbered Gold Bars, other than tola bars Rs 280/ 10 gms Rs 200/ 10 gms

SECTOR SUMMARY Sector Summary Sector Budget Impact Preferred Picks Agriculture & Fertilizer Positive NA Automobiles Positive Bajaj Auto, TVS Motors Aviation Negative NA Banking & NBFC Positive ICICI Bank, HDFC Bank, Axis Bank, SBI BOI, Union Bank,IDFC, LIC Housing Capital Goods and Engg. Neutral L&T, Thermax, Havells, Greaves Cotton Bharat Electronics, Hind Dorr Oliver Cement Negative Grasim, Shree Cements Construction Positive IRB Infra, IVRCL, Pratibha Industries, Unity Infra FMCG Positive NA Hotels Negative NA Information Technology Neutral Infosys, TCS, KPIT, NIIT Technologies Logistics Positive NA Media Neutral ENIL, HT Media, Sun TV Network Metals and Mining Neutral Sesa Goa Oil & Gas Negative Cain India, IGL Pharmaceuticals Negative NA Power Neutral NTPC Real Estate Neutral NA Retail Positive NA Telecom Neutral NA


AGRICULTURE & FERTILIZER BUDGET HIGHLIGHTS & IMPACT In the budget, government has continued to provide thrust on its four-pronged strategy covering 1) agricultural production 2) reduction in wastage of produce 3) credit support to farmers and 4) impetus on the food processing sector. Last year Nutrient Based Subsidiary (NBS) policy was successfully implemented for all fertilizers except urea. The policy has been well received and the availability of fertilizers has improved in the country. The extension of the NBS regime to cover urea has also been under consideration. To deal with the production and distribution bottlenecks, government has increased allocations for the various schemes under the ongoing Rashtriya Krishi Vikas Yojna (RKVJ) from Rs 67.5 bn last fiscal to Rs 78.6 bn in 2011-12. Similarly, following are the key takeaways for the agriculture sector. 27% increase in targeted agriculture credit from Rs 3750 bn last year to Rs 4750 bn in 2011-12. Impact: Government has been constantly aiming at increasing the direct lending to the farmers. In addition to the 25% increase in proposed agriculture credit, the present interest subvention scheme of providing short term crop loans at 7% to farmers is further reduced to 4%. These higher outlays for the sector provide a positive outlook for the sector. Continuance of loan concessions to the farmers would also help in sustaining current growth in rural demand. Enhancing the storage and cold chains to boost the agriculture supply chain in the country; expediting the processes of setting up of Mega food parks Impact: Strengthening the food supply chain has been among the key focus areas of the government. It aims at expediting the process of setting up 15 mega food parks in addition to the proposed 15 in 2011-12. This is likely to improve linkage between agriculture and industries and reinforce meaningful investment in the sector. Government has also proposed for the introduction of various viability gap funding schemes to boost public private partnership in the sector. Reduction of basic custom duty on micro-irrigation equipment from 7.5%to 5%. Impact: Irrigation has been a thrust area for the government. Accelerated irrigation programs that entail significant addition of farm land required to be irrigated is likely to benefit from this. Micro irrigation is considered as an environment friendly and efficient means of irrigation especially for dry land farming. Include capital investment in fertilizer production as an infrastructure sub sector. Impact: Investment in fertilizer sector is capital intensive. Capacity addition in this space has remained muted since past few years. Including capital investment in the fertilizer production as an infrastructure space would benefit the sector in the medium to long term. Special attention to palm oil promotion Impact: The domestic production of edible oil meets only 50% of country's annual demand. The gap in supply is met with relatively pricey imports. Government has proposed to provide Rs 3 bn to bring 60,000 hectares of land under palm plantation by integrating farmers with the market. We do not have active coverage on this sector BUDGET IMPACT: POSITIVE

AUTOMOBILES BUDGET HIGHLIGHTS & IMPACT Status-quo maintained on excise duty Impact: Finance Minister in his budget presentation kept the central excise duty rates unchanged at 10% that was in line with our expectations. Justifications given behind this move are 1. Better margin translating into higher investment rates 2. Stay on course towards GST. We believe that this move will make the task of the auto players a bit easier who are already facing margin pressure due to rising commodity prices. Emphasis on green fuel technology/car Impact: Finance Minister in his budget speech showed his intentions towards promotion of vehicles that run on clean fuel. Following announcements were made related to this aspect -

National Mission for Hybrid and Electric Vehicles to be launched in collaboration with all stakeholders
Custom duty exemption and concessional rate of excise duty extended to batteries imported by the electrical vehicle manufacturers for the replacement market
Vehicles based on the fuel cell or hydrogen cell technology to come under the concessional 10% excise duty bracket
Full exemption from custom duty and CVD in relation to import of specified part used in the making of hybrid vehicle. Furthermore concessional rate of excise duty at 5% will be applicable if those specified parts are produced domestically.
Government has also proposed to lower the excise duty rate from 10% to 5% on kits and their parts that help convert fossil fuel vehicles into hybrid vehicles Above measures are towards promoting clean fuel technology. However we do not see any major positive impact of the above mentioned measures in the short to medium term as this segment has hardly any presence in the Indian automobile industry. Focus on agriculture continues

Impact: Government through its budget continued to retain their focus on the agriculture sector. Various schemes were announced for bringing about the development of rural economy. Listed below are few measures which we believe are positive for the automobile sector - l 27% increase in credit flow to the farmers as against 18% increase provided during the previous budget l Increase in interest subvention from 2% to 3% for farmers who repay their crop loans on time and thereby bringing the effective interest rate on crop loans to 4%. We believe that the above measures are positive for tractors players including Escorts. Furthermore overall growth in the rural economy will be beneficial for the 2W players as well. BUDGET IMPACT: POSITIVE

AVIATION BUDGET HIGHLIGHTS & IMPACT Budget remains silent on tax rationalization of ATF Impact: As expected, the budget did not touch upon the topic related to lowering of taxes on ATF. Aviation companies have been demanding for long to bring ATF under the declared goods status (where sales tax is charged at 4-5%) as against the current sales tax of more than 20%. Given high crude oil prices, ATF prices have been constantly on a rise over the past few months which is a major negative for all the players in the aviation sector.

Increase in service tax on journey 

Impact: Following changes were announced in the service tax and will come into effect from 1st April 2011-

Service tax increased from Rs100 to Rs150 for journey made in the economy class on the domestic route. We expect the players to pass on the increase and do not see any major impact on the passenger traffic because the increase is nominal.
Service tax increased from Rs500 to Rs750 for journey made in the economy class on international routes. Competition from international carriers primarily on the shorter routes will make it difficult for the Indian players to pass this to the customers. This will have a negative impact on the players in the sector.
Service tax increased to 10% for journeys made in higher class (other than economy class) on the domestic route (in line with journeys in higher class on international air travel). We expect this will be passed on to the passengers but could impact traffic in higher classes to a certain extent and accordingly is negative for the sector.

We do not have active coverage on this sector BUDGET IMPACT: NEGATIVE


The budgeted fiscal deficit for FY12E is 4.6% as against 5.1% (revised estimate) reported for FY11; net market borrowing budgeted at Rs.3.43 tn for FY12E.

Impact: The Government needs to borrow Rs.3.43 trillion from the market to meet its fiscal deficit. This is lower than the market expectations and reduces the concern of crowding out effect on private investment. RBI has exhibited its capability in recent years, when it managed additional borrowings in the non-disruptive manner. We believe, RBI is likely to manage the market borrowing program without much impacting the yield curve. The budget has provided Rs.202 bn for recapitalization of state-run banks. Impact: Rs.202 bn has been earmarked for recapitalization of PSU banks to enable them to maintain the minimum tier-I capital at 8.0%. The proposed recapitalization includes Rs.127 bn loans taken from World Bank and Rs.60 bn (plus another Rs.15 bn) allocated through budget. This would help PSU banks in maintaining the minimum tier-I capital at 8% and increase government stake in some of the banks to 58%. This is likely to aid them in growing their loan book without facing capital constraint. FII limit in Infrastructure bonds with residual maturity of 5 years to be raised to $25 bn ($5 bn earlier) taking the overall limit to $40 bn ($20 bn earlier) in corporate bonds. Impact: This hike in FII limits will help increase the investment in infrastructure sector and lead to development of the corporate bond markets in the country. In turn, it would also encourage capital inflows to meet the high current account deficit in our economy. FIIs would also be allowed to invest in unlisted bonds with a minimum lockin period of 3 years, during which they can trade amongst themselves. We believe this would ease fund flow to the special purpose vehicles of infrastructure companies. Extended the 1% interest subvention scheme on housing finance upto Rs.1.5 mn (Rs.1.0 mn earlier) and house value of Rs.2.5 mn (Rs.2.0 mn earlier). Impact: With government’s thrust on increasing affordable housing and to continue stimulating small ticket home loan borrowers, the budget has extended the 1% interest subvention scheme on housing loan upto Rs.1.5 mn (Rs.1.0 mn earlier) and house value of Rs.2.5 mn (Rs.2.0 mn earlier). We opine that, the move will be significantly positive for the housing finance companies in maintaining the traction in the home loan growth (especially small ticket mortgages) in India. Allocation of ~Rs.2.14 tn towards infrastructure sector (23.3% growth YoY); constitutes 48.5% of gross budgetary support to plan expenditure Impact: Continuing thrust on infrastructure development is positive for overall infrastructure development space. This will offer attractive opportunity to domestic specialized financing institution to participate in development by way of project financing as well as equity investment. Extension of the additional deduction of Rs.20,000 to investments made by individuals in infrastructure bonds for one more year. Impact: The extension of tax deduction on infrastructure bonds investment for one more year would help mobilize retail savings into the sector. This is positive for Infrastructure financing NBFCs. BUDGET IMPACT: POSITIVE

Raising the target of credit flow to the farmers from Rs.3.75 tn to Rs.4.75 tn. Impact: By raising the growth target of ~27% for agriculture loans which comes under priority sector loans (PSL) category is slightly negative for PSU banks who would be forced to lend more than the system growth. To allow tax free bonds of Rs.300 bn to be issued by various government undertakings in FY12. Impact: This includes tax free bonds of worth Rs.100 bn by Indian Railway Finance Corporation, Rs.100 bn by NHAI, Rs.50 bn by HUDCO and Rs.50 bn by Ports. This is likely to boost infrastructure developments in railways, ports, housing and highways development. This is positive for Infrastructure financing NBFCs. Creation of “India Microfinance Equity Fund” of Rs.1.0bn with SIDBI to support MFI in their growth targets. Impact: Creation of a dedicated fund for providing equity to smaller MFIs would help them in achieving scale and efficiency in their operations. Although it is a small amount, it recognizes the importance of MFIs in achieving the goal of financial inclusion.

To permit SEBI registered MFs to accept subscriptions of foreign investors who meet the KYC norms.

Impact: The proposed entry of FII investment into the MFs space will allow strong fund flows in the coming year. This is likely to be positive for domestic Financial Institutions having asset management business.

CAPITAL GOODS & ENGINEERING BUDGET HIGHLIGHTS & IMPACT Excise rate maintained at 10% Impact: Neutral. The FM has maintained Excise duty at 10%. The capital goods industry is reeling under cost pressures from commodities and a further excise rate hike would have been negative. Thus status quo on excise should come as a relief to the manufacturing sector.Central excise exemption on specified equipment used for preservation of agriculture produce Impact: Positive. To attract investment in cold-storage chain, capital investment will be eligible for viability gap funding scheme of the Finance Ministry. It is also proposed to recognize cold chains and post-harvest storage as an infrastructure sub-sector. The FM has also extended full exemption from excise duty on air-conditioning equipment and refrigeration panels used for cold storage. We believe this move will be a positive for manufacturers of coldstorage equipments like Blue Star and Voltas. n Rural Broadband connectivity Impact: Positive. A plan has been finalised to provide Rural Broadband Connectivity to all 2,50,000 Panchayats in the country in three years. This is a positive for Sterlite Technologies, which is the largest manufacturer of optical fibres cables in the country. Defence capex raised by 13.8% Impact: Positive. Capital expenditure on defense for 2011-12 has been raised by 13.8% to Rs.692 bn. The increase in planned capex on defence is positive for Bharat Electronics Ltd (BEL) as higher allocation should translate into increase in order book. Excise duty exemption on brownfield expansion of ultra-mega power project Impact: Positive. Excise duty on Greenfield investment in ultra-mega power project is eligible for customs as well as excise duty under the mega-power policy. However, brownfield expansion of existing mega-power project has to pay 2.5% customs duty (no CVD) in case of imported equipments and full excise duty in case of domestic suppliers of main plant equipment. This creates a disability for the domestic suppliers who are required to pay Central Excise duty on supplies to such projects. To provide a level playing field to domestic manufacturers (BHEL, L&T, BGR, JSW-Toshiba and Thermax), the FM has proposed to exempt excise duty for ultra-mega power project brownfield expansion. The benefit however is only symbolic as none of the ongoing ultramega power projects have announced their brownfield expansion plans. BUDGET IMPACT: NEUTRAL

CEMENT BUDGET HIGHLIGHTS & IMPACT Continued focus on infrastructure creation Impact: Positive. Cement demand is expected gain momentum, after witnessing subdued demand in FY11, with continuous thrust of government on infrastructure creation. With cement demand having direct correlation with infrastructure investments as well as GDP growth, we expect it to grow at a CAGR of 9.9% between FY11-FY13. Change in excise duty structure Impact: Negative. Existing excise duty rates have been changed for cement sector to composite rate structure having an ad valorem and specific component. For cement selling below Rs 190 per bag, new duty is at 10% ad valorem plus Rs 80 per tonne as against Rs 290 per tonne earlier. For cement selling above Rs 190 per bag, new duty is 10% ad valorem plus Rs 160 per tonne. Since current average selling price in India is above Rs 260 per bag, we believe that this change in the duty structure would result in increasing the overall excise outgo by Rs 1.5-2 per bag. Ad valorem rate would be arrived at by taking the ex factory price plus freight. Though cement companies are expected to pass on the hikes to the end user but it will be difficult for companies to sustain these price hikes in the present prevailing oversupply situation. Reduction in gypsum and pet coke customs duty Impact: Positive. Customs duty on gypsum and pet coke has been reduced from 5% to 2.5% now. This is expected to be positive for companies like Shree Cement which are dependent upon pet coke. Overall impact of reduction in gypsum and pet coke customs duty is approx Rs 1-1.5 per bag. BUDGET IMPACT: NEGATIVE

CONSTRUCTION BUDGET HIGHLIGHTS & IMPACT Allocation for infrastructure sector is 23.3% higher than FY11 Impact: Positive. Allocation of nearly Rs 2140 bn has been made towards infrastructure sector which is 23.3% higher than FY11. It forms nearly 48.5% of the Gross Budgetary Support to plan expenditure. We expect this amount to be utilized for development of physical infrastructure such as roads, ports, airports, railways to sustain high economic growth. This would translate into higher order inflows for companies present in these segments such as IRB Infra, IVRCL, NCC, Simplex Infra and Unity Infra. Increased allocations for road, irrigation, housing and drinking water supply Impact: Positive. Allocation for road, irrigation, housing and drinking water supply has been increased by Rs 100 bn to Rs 580 bn for FY12. This would be done through Bharat Nirman which includes Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna, Indira Awas Yojna, National Rural Drinking Water Programme and Rural telephony. We expect it to be positive for IVRCL, NCC, Pratibha Industries and Unity Infra Tax free bonds for infrastructure development Impact: Positive. Government has allowed tax free bonds of Rs 300 bn to give boost to infrastructure development in railways, ports, housing and highways development. This includes Indian Railway Finance Corporation 100 bn, National Highway Authority of India Rs 100 bn, HUDCO Rs 50 bn and Ports Rs 50 bn. This is expected to ease funds with these organizations and hence award more projects. Hike in FII limit for infrastructure sector corporate bonds Impact: Positive. FII limit for investment in corporate bonds of infrastructure companies has been hiked from $5 bn to $25bn. This is likely to enhance the flow of funds to the infrastructure sector and FIIs would also be allowed to invest in unlisted bonds of of infrastructure SPV's with a minimum lock in period of three years. This would be positive for companies having SPVs that are looking for raising funds such as IVRCL, NCC, Madhucon Projects, IRB Infra. BUDGET IMPACT: POSITIVE

Infrastructure debt fund Impact: Positive. Setting up of dedicated infrastructure debt fund has been proposed to augment low cost funds from abroad for the infrastructure sector. Income from that fund would be exempt from tax. It is also proposed that any income received by non-resident from that fund shall be taxable at the rate of 5% only. This is expected to ease liquidity for the infrastructure sector. Service tax exemption on few services Impact: Positive. Service tax exemption is extended to works contract service provided for construction or finishing of new residential complex under Jawaharlal Nehru National urban renewal mission or Rajiv Awaas Yojana. Exemption is also being provided for services provided within a port or airport under 'Works contract' service for specified services. This would be positive for construction companies carrying out works contract in these segments such as Unity Infra, Pratibha Industries, NCC etc. Increase in MAT from 18% to 18.5%; surcharge reduced from 7.5% to 5% Impact: Neutral. MAT has been increased from 18% to 18.5% but correspondingly surcharge has been reduced from 7.5% to 5% so overall impact in tax rate is not much. We expect this to be neutral for companies that fall under MAT regime. MAT on SEZ's Impact: Negative. Sunset clause has now been proposed for availability of exemption from MAT in case of SEZ developers and units in SEZs. Thus, with effect from FY12, SEZ developers or units operating in SEZs will have to pay MAT. Along with this, exemption of dividend distribution tax is also proposed to be discontinued from 1st June, 2011. This would be negative for companies developing SEZs.

FMCG BUDGET HIGHLIGHTS & IMPACT Continued Emphasis on Rural Sector Growth, Financial Inclusion Impact: Positive. The budget takes the following steps that affect rural income generation/ fund availability – a/ 17% growth in social sector spending, to Rs 1.61 trn, including growth in Bharat Nirman schemes of Rs 100 bn, b/ improved availability of credit through raising of credit flow to farmers to Rs.4.75 trn. We note that although NREGA allocation has not been raised, NREGA wages have been indexed to inflation. Companies that have a higher exposure to rural India shall continue to benefit from the rural emphasis of the government. No changes in headline excise duties, including cigarettes Impact: Positive for FMCG companies, including tobacco companies. The budget has left the excise duties for cigarettes unchanged, after the steep hike in last year’s budget. The lack of any changes is a positive for cigarette manufacturers, as they would ensure higher volume growth and stability in FY12 profitability. Excise duties on most items have remained unchanged, which augurs well for the demand scenario in the sector. Improved Visibility on GST Implementation Impact: Long-Term Positive for FMCG players. The government is due to announce a constitutional amendment bill in the current session of the parliament, aimed at introduction of GST. There is a clearer roadmap for GST implementation, and the government’s commitment towards the same. GST is likely to reduce end – consumer prices, and is likely to benefit FMCG companies. This announcement is, therefore a long-term positive for the industry in general. Changes in MAT Impact: Neutral. The changes in MAT (18.5%, from 18% currently), along with the changes in surcharge (5%, from 7.5% currently) are largely neutral for all companies under the MAT. n Certain items, which were thus far enjoying excise rates of 4%, have been raised to 5%. Impact: Minor Negative for large FMCG companies. Affected items include miscellaneous consumer products such as sauces, ready-to-eat items, coffee, and education stationary. However, given low dependence of most majors on these items, we believe the negative impact shall be minor.

Attempts to address long-term supply chain issues:

Impact: Long-Term Positive for FMCG players. The budget has taken attempts to improve supply chain issues that arise in food items, and has, specifically, launched a Rs 3 bn plan to improve palm oil output in the country. This is a positive for companies highly exposed to the commodity.We do not have active coverage on this sector BUDGET IMPACT: POSITIVE

HOTELS BUDGET HIGHLIGHTS & IMPACT New services brought under service tax net Impact: Following new services have been included in the service tax net Hotel accommodation in excess of declared tariff of Rs1000 per day will be levied an effective service tax rate of 5% Service provided by air-conditioned restaurants that have license to serve liquor will be levied an effective service tax of 3%. We view the above mentioned measures as a minor negative for the hotel sector We do not have active coverage on this sector BUDGET IMPACT: NEGATIVE

INFORMATION TECHNOLOGY BUDGET HIGHLIGHTS & IMPACT STPI sunset clause not extended beyond FY11 Impact: The sunset clauses for deduction in respect of export profits under Sections 10A and 10B of the IT Act have not been extended beyond FY11. Thus, companies will have to start paying profits on income generated from units operating in software Technology Parks. While this will lead to higher taxes for companies, it will not be incrementally negative because the sunset clause was expected to expire on March 2011 and all projections were based on that assumption.

MAT for SEZ developers and units operating in SEZs WEF FY12

Impact: Companies operating in SEZs will now have to pay MAT WEF FY12. This will be incrementally negative for these companies from a cash-flow perspective. EPS estimates may not be impacted as companies can avail of deferred tax credit. However, there will be an impact on cash flows of all companies which is a marginal negative. Reduction in surcharge Impact:This provision will have a marginally positive impact for non-MAT companies. The provisions of the Union Budget have a largely neutral impact on the sector, in our opinion. Changes in surcharge will impact marginally the EPS estimates for companies. MAT will have an impact in FY12 but marginal. The STPI sunset clause not being extended beyond FY11 will result in status quo for companies. The focus on opening up avenues for IT companies in government projects, promoting higher technical education, so as to meet potential demand for employees from this sector, are positive over the longer term. We remain optimistic on the longer term prospects of the industry. The Global Delivery Model has gained significant acceptance among existing and potential clients. We believe that, the outsourcing and off-shoring story will gather further steam in the future and this will see an increased flow of longer term and larger contracts to Indian vendors. Also, focused smaller companies with expertise on select verticals will be able to move up the value chain and attract larger clients, thereby, improving their longer term prospects. Stock prices of most IT companies have out-performed the markets in the recent past, in line with the improvement in demand environment. We expect the sentiment towards the sector to remain positive and the sector to provide decent returns over the medium term, subject to near term volatility. At current levels, we prefer larger names like Infosys and TCS; we also retain our positive bias for select mid-caps like KPIT Cummins and NIIT Technologies. BUDGET IMPACT: NEUTRAL

LOGISTICS BUDGET HIGHLIGHTS & IMPACT Central excise exemption on specified equipment used for preservation of agriculture produce Impact: Positive. To attract investment in cold-storage chain, capital investment will be eligible for viability gap funding scheme of the Finance Ministry. It is also proposed to recognize cold chains and post-harvest storage as an infrastructure sub-sector. The FM has also extended full exemption from excise duty on air-conditioning equipment and refrigeration panels used for cold storage. We believe this move will be a positive for manufacturers of coldstorage equipments like Blue Star and Voltas. Service tax on air travel raised by Rs 50 Impact: Neutral. The FM has proposed to raise the service tax on air travel by Rs 50 in the case of domestic air travel and Rs 250 on international journeys by economy class. It has also been proposed to tax travel by higher classes on domestic sector at the standard rate of 10 per cent to bring it on par with journeys by higher classes on international air travel. The increase in service will be passed through to the customer. Tax free infrastructure bonds upto Rs 30 bn for investment in ports and transportation infrastructure Impact: Positive. In order to give a boost to infrastructure development in railways, ports, housing and highways development, the FM has proposed to allow tax free bonds of Rs 300 bn to be issued by various Government undertakings in the year 2011-12. This includes Indian Railway Finance Corporation Rs 100 bn, National Highway Authority of India Rs 100 bn, HUDCO Rs 50 bn and Ports Rs 50 bn. The move is expected to improve logistics infrastructure in the country. Progress on GST implementation Impact: Positive. While no timeline has provided for shifting to GST, the FM observed that decisions on the GST have to be taken in concert with the States with whom the central government's discussions have made considerable progress in the last four years. Areas of divergence have been narrowed. As a step towards the roll-out of GST, it is proposed to introduce the Constitution Amendment Bill in this session of Parliament. Work is also underway on drafting of the model legislation for the Central and State GST. Among the other steps that are being taken for the introduction of GST is the establishment of a strong IT infrastructure. Introduction of GST will lead to rationalization and implification of the tax structure at both the centre and state levels and there would be continuous tax credit right from the producer to the final consumer level. This is overall positive for the logistics industry as it would facilitate easier interstate movement of goods and transfer of business from the unorganized to the organized sector, thereby providing additional logistics opportunities. We do not have active coverage on this sector BUDGET IMPACT: POSITIVE

MEDIA BUDGET HIGHLIGHTS & IMPACT Continued emphasis on rural growth Impact: Positive on the media sector (advertising revenues). Expenses on schemes such as Bharat Nirman have been augmented significantly, and attempts are being made to improve credit availability for the farm sector. These are longterm positives for consumption in rural areas, and will impact media companies. We believe regional newspapers (DB Corp, Hindustan Media Ventures, Jagran Prakashan), and GEC players (Zee Entertainment, Sun TV) are likely to benefit from the same.

Changes in MAT and surcharge

Impact: Neutral. The government has changed the MAT rate to 18.5% from 18% currently, and has simultaneously reduced the surcharge to 5% from 7.5%, which is largely a neutral event for all companies covered under MAT. Extension of concessional customs duty (5%) to mailroom equipment Impact: Currently, concessional customs duty is applicable to high speed printing presses. This announcement’s impact is likely to be insignificant; given low dependence of companies on imported items in mailroom equipment, as also the low capex requirements thereof.

Full exemption on customs duty on jumbo film rolls of 400 feet and

1000 feet: Impact: The announcement shall have an impact on companies involved in the production of films, and is likely to benefit companies like UTV Software and Eros International. However, the impact of the same is likely to be small, given low expense exposure to these items. BUDGET IMPACT: NEUTRAL

Lack of any other announcement makes the budget a neutral event for media sector. The government has sounded positive on taking measures to contain inflation in the long-term, which, along with emphasis on rural sector growth, is a positive for media companies. We had expected a hint of reforms in radio FM, and changes relating to digitization, in the budget sound-bytes. Absence of the same is a minor disappointment, and announcements on these are likely delayed, not denied.

We believe media companies remain fundamentally strong, on the back of strong domestic demand growth and rising brand consciousness/ adoption. Our investment thesis on the media sector is derived from expectations of strong growth in advertising expenditures, higher subscription revenues, as well as higher monetization among companies that have invested behind new properties/ genres. The budget shall have minimal impact on our investment ideas/ earnings estimates. Our favored picks in the space are HT Media, Sun TV, and ENIL. Softness in consumption growth, due to higher inflation or other macroeconomic factors, is the largest risk to our sector view.


Export duty on iron ore fines quadruples to 20% while raised by onethird for lumps

Impact: 300% increase in export duty on iron ore fines to 20% came as a big negative surprise as expectations in case of increase were limited to 10% and in best case 15%. Export duty on lumps also increased to 20%. This would have significant negative impact on Sesa Goa. Steel (Neutral) Sustained infrastructure thrust to stimulate steel demand Impact: Budgetary support for steel intensive infrastructure sector increased by 23% to Rs.2140bn. Positive for steel companies as higher outlay for road, railways, power, urban and rural infrastructure development to lead to higher steel consumption. n Excise duty on steel/auto/consumer durable remains untouched at 10% Impact: Further rollback of excise duty to 12% for steel, automobiles or consumer durables would have been negative. So no duty change comes as a relief. Increase in effective MAT by 0.075% to 19.425% Impact: Negligible impact for steel and sponge iron players who have reasonable contribution from power unit sales. MAT of 18% + 7.5% surcharge which effectively meant 19.35% tax replaced by 18.5% + 5% surcharge which effectively means 19.425%, so negligible change. BUDGET IMPACT: NEUTRAL

Stainless Steel (Positive)/ Ferro Alloys (Negative) Duty cut on stainless scrap to 0 from 2.5% and from 5% to 2.5% on ferro- nickel Impact: The Budget has proposed to cut duty on stainless scrap to 0 from 2.5% and that on ferro- nickel to 2.5% from 5%. This would translate into reduced cost of production by $15-17/t for stainless steel companies so marginally positive for stainless steel companies. Ferro alloy companies would be hit as imports become cheaper by 2.5%.

OIL & GAS BUDGET HIGHLIGHTS & IMPACT MAT applicable to SEZ - section 115 JB (6) Impact: Under the existing provisions of section 115 JB (6) of income tax act,exemption was allowed from payment of MAT on book profits in respect of income earned from special economic zone (SEZ). The government has removed this exemption w.e.f 01St April 2011. Hence, erstwhile RPL (now merged with RIL) refinery which is operating under a SEZ, will now be liable to pay MAT at the rate of 20% (basic tax rate 18.5% (increased from 18%), surcharge 5% (reduced from 7.5%), education cess 3%). We believe this will be a negative for RIL as its average tax rate will increase in FY12 leading to higher cash outflows.

Direct cash subsidy on kerosene - BPL

Impact: The government provides subsidies on fuel such as Kerosene and LPG. However, a significant proportion of the subsidized fuel does not reach the targeted beneficiaries and hence there is a large scale diversion of subsidized kerosene oil. In order to arrest this misuse, the government is now planning towards direct transfer of cash subsidy to people living below poverty line in a phased manner. A task force headed by Shri Nandan Nilekani has been set-up to work out the modalities for the proposed system of direct transfer of subsidy for kerosene and LPG. The interim report of the task force is expected by June 2011. The government expects the system will be in place by March 2012. We believe this is a major positive for the all OMCs in the long run, if implemented as budgeted. Disinvestment in PSUs Impact: In FY11, government will raise ~Rs.221.4 bn as against a target of Rs. 400 Bn from disinvestment, as the government has postponed the FPO of ONGC and IOC to FY12. We believe this will be stock Neutral. Govt. has reduced the subsidy allocation for petroleum sector Impact: Union Budget 2011 has pegged the petroleum subsidy provision at Rs 236 Bn for FY12 as against Rs.383.9 bn in FY11. We believe the allocation made for FY 12 is very low considering the current crude oil price levels. We believe this is not positive for OMCs unless crude price corrects substantially or diesel price is de-regulated.For FY11, till now the government has given a subsidy of Rs. 210 Bn to the OMCs for the losses incurred on retail fuel sale and made a further provision of ~Rs.173.86 Bn for FY11. MAT increased to 18.5% from 18% Impact: The government at one hand has increased the MAT rate from 18% to 18.5% but on the other hand has reduced the surcharge from 7.5% to 5.0%. So, we believe this is neutral for Cairn and RIL who are currently liable to MAT. BUDGET IMPACT: NEGATIVE

PHARMACEUTICALS BUDGET HIGHLIGHTS & IMPACT SEZ is brought under MAT Impact: Under the existing provisions of section 115 JB (6) of income tax act, exemption was allowed from payment of MAT on book profits in respect of income earned from special economic zone (SEZ). The government has removed this exemption w.e.f 1st April 2011. This will increase effective tax rates for companies. We believe this is negative for the sector especially for the currently companies operating under SEZs. Government has increased the MAT rate on one hand from 18% to 18.5% but on the other hand has reduced the surcharge from 7.5% to 5%. Hence effective tax rate remains the same.

Excise duty on Pharma formulations will go up to 5% from 4%.

Impact: This could be marginally negative for the sector as pass through would be difficult in the highly competitive environment. We do not have active coverage on this sector BUDGET IMPACT: NEGATIVE

POWER BUDGET HIGHLIGHTS & IMPACT Excise exemption on equipment procured for brownfield expansion of ultra-mega power project Impact: Positive. Currently, brownfield expansion of existing mega-power projects attract customs duty of 2.5% (no CVD) in case of imported equipments and full excise duty in case of domestic equipments. The FM has proposed to exempt domestic suppliers from excise duty in case of brownfield expansions. This is expected to bring down the cost of equipment supply from domestic players like BHEL and L&T. However, as of now, none of the ongoing UMPPs have announced brownfield expansion.

Increase in MAT marginally

Impact: MAT has been raised from 18% to 18.5% which will be partly offset by reduction in surcharge from 7.5% to 5%. The overall impact will be marginal. BUDGET IMPACT: NEUTRAL

Urban housing shortage (mn units) Source: Industry Rural housing shortage (mn units) Source: Industry REAL ESTATE BUDGET HIGHLIGHTS & IMPACT Enhanced limit in priority sector lending Impact: Positive. Finance Minister has enhanced the housing loan limit from Rs 2 mn to Rs 2.5 mn under priority sector lending. This move would be positive for players focused on low cost housing. Extension of interest subvention Impact: Positive. Interest subvention of one per cent has been extended to housing loan upto Rs 1.5 mn where cost of house does not exceed Rs 2.5 mn from the present limit of Rs 1 mn where cost of house does not exceed Rs 2 mn. This move would be positive for players focused on low cost housing.

MAT on SEZ's

Impact: Negative. Sunset clause has now been proposed for availability of exemption from MAT in case of SEZ developers and units in SEZs. Thus, from 1st April, 2012, SEZ developers or units operating in SEZs will have to pay MAT. This would be negative for players developing SEZs. We do not have active coverage on the sector. BUDGET IMPACT: NEUTRAL

RETAIL BUDGET HIGHLIGHTS & IMPACT Boost in GDP growth to spur consumption Impact: Positive. Continued measures of government to boost GDP growth are expected to drive Indian consumerism. This is likely to be positive for the retail sector.Higher disposable income due to higher tax exemption to spur growth Impact: Positive. Due to increase in the exemption limits on personal income tax for individuals, disposable income is expected to increase. This is expected to result in higher spending power as well as consumption, thereby benefiting retail sector. We do not have active coverage on the sector. BUDGET IMPACT: POSITIVE

TELECOM BUDGET HIGHLIGHTS & IMPACT With gross subscriber base reaching 770 million and revenues crossing USD 20 bn, Indian telecom sector has reached its maturity phase with incremental growth coming from increasing penetration in rural/semi-urban areas. In the budget, government has specified that it expects to raise Rs 296.5 bn through recurring license fees and other usage charges from the telecom sector. The usage charges include license fees from the telecom operators, receipts on account of spectrum usage charges and auction of third generation (3G) and broadband wireless access (BWA) spectrum. Status Quo for section 80IA (12A) of IT act. Impact: Telecom sector has been looking forward for the extension of the tax holiday benefits under Section 80IA of the I-T Act especially for the new players in the industry. Such extension would have provided thrust to the industry in the short to medium term in terms of the potential tax savings. n Status Quo for section 80IA (12A) of IT act. Impact: Amidst hyper-competition in the sector that has been forcing telecom companies to streamline their operations, consolidation appears to be a viable inevitable option. However, the restrictive provisions in Section 80IA(12A) of the I-T Act denying tax holiday to undertakings in the event of amalgamation been deterrent to such consolidations in the sector. We do not have active coverage on the sector. BUDGET IMPACT: NEUTRAL


Sir,Due to urbanization,there is reduction in Agriculture/cultivable land in our country.The present agriculture scenario in international Agriculture is Vertical Farming.Cultivation method is adopted without soil.Why don't we go for advantage in Agriculture.The budget should allocate more funds for Agriculture research,then only our future generation will be fed.Regards,a.nazar.

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